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Internal Reconstruction Part-II

The document discusses the process of internal reconstruction of a company. It describes how shares can be surrendered and reissued, accounting treatments for cancellation of claims and reconstruction accounts, and provides an example problem and solution.

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INTER SMARTIANS
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55 views

Internal Reconstruction Part-II

The document discusses the process of internal reconstruction of a company. It describes how shares can be surrendered and reissued, accounting treatments for cancellation of claims and reconstruction accounts, and provides an example problem and solution.

Uploaded by

INTER SMARTIANS
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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Internal

Reconstruction
Part-II
BY: BHOOMIKA GARG
Surrender of Shares
It means handing over or giving up the possession of the shares to the
company by the shareholders. In Companies Act, surrender of shares
amounts to reduction of share capital. However, the surrender shares can
be re- issued to:
To new shareholders
In reducing the trade Liabilities i.e. creditors
In reducing non- trading liabilities i.e. debenture holders
Note: When the surrendered shares are not re- issued, these are cancelled
and the balance is transferred to Reconstruction A/C.
Contd.
The Accounting treatment would be:
a) On Surrender of Shares
Share Capital A/C Dr.
To Shares Surrendered A/C
b) On Re- issue of Surrendered Shares
Shares Surrendered A/C Dr.
To Share Capital A/C
Note: Whether issued to new shareholders or to pay outside liabilities.
c) On Cancellation of Surrendered Shares
Shares Surrendered A/C Dr
To Reconstruction A/C
Example for Surrender of
Shares
Illustration
The Equity shareholders of XYZ Ltd. Agree to surrender their shares of Rs. 1,00,000.
Further, Rs. 80,000 debenture holders and Rs. 50,000 trade creditors agree to give up or
sacrifice or forego their claims by 50% each in exchange for equity shares to be issued
from the surrendered shares to settle their remaining claims. Journalize it.
Ans.
a) On Surrender of Shares
Equity Share Capital A/C Dr. 1,00,000
To Shares Surrendered A/C 1,00,000
b) For issue of equity shares out of surrendered shares
Shares Surrendered A/C Dr. 65,000 ( 40,000 + 25,000)
To Equity Share Capital A/C 65,000
Contd.
c) For Cancellation of claims by debenture holders and creditors
Debentures A/C Dr. 80,000
Trade Creditors A/C Dr. 50,000
To Reconstruction A/C 1,30,000
d) For Cancellation of the balance in shares surrendered A/C
Shares Surrendered A/C Dr. 35,000
To Reconstruction A/C 35,000
Note: Calculation of total sacrifice:
By shareholders 1,00,000
By Debenture holders 40,000
By Trade Creditors 25,000
Utilization of Reconstruction
A/C
At this stage the Reconstruction A/C will show some credit balance on account
of sacrifice made by shareholders, outside liabilities, profit on sale of fixed
assets etc. Reconstruction A/C is utilized in following manner:
a) Writing Off fictitious and intangible Assets: The Accounting treatment is:
Reconstruction A/C Dr.
To Preliminary Expenses A/C
To Discount on issue of shares A/C
To Patents A/C
To Goodwill A/C
To Surplus A/C ( Negative Balance)
Note: These have to be written off whether given in the problem or not.
Contd.
b) In writing down overvalued fixed and current assets: The accounting
treatment is:
Reconstruction A/C Dr. ( With the Amount of Reduction)
To Fixed assets A/C ( Individual Fixed Assets
To Current Assets A/C ( Individual Current Assets)
c) Recording New Liability: The accounting treatment is:
Reconstruction A/C Dr.
To Particular Liability A/C
Note: If some unrecorded Liability is directly paid in cash, the journal
entry would be:
Reconstruction A/C Dr.
To Bank A/C
Contd.
d) Expenses of Reconstruction: The Accounting treatment is:
Reconstruction A/C Dr.
To Bank A/C
e) Credit Balance in Reconstruction: If there is some credit balance in
Reconstruction A/c, it is transferred to Capital Reserve A/C. The journal
entry would be:
Reconstruction A/C Dr.
To Capital Reserve A/C
Problem I
Contd.
Solution
Date Particulars Dr.( amount) Cr.( Amount)
31.3.16 Equity Share Capital(Rs.100) A/C Dr. 20,00,000
To Equity Share Capital(Rs.5) A/C 1,00,000
To Reconstruction A/C 19,00,000
31.3.16 Equity Share Capital(Rs.5) A/C Dr. 1,00,000
Equity Share Capital(Rs.10) A/C 1,00,000
31.3.16 O/S Deb. Interest A/C Dr. 1,20,000
To Reconstruction A/C 1,20,000

31.3.16 12% Debentures A/C Dr. 5,00,000


To 14% Debentures A/C 5,00,000
31.3.16 Bank A /C Dr. 5,00,000
To Equity Share App. & All. A/C 5,00,000

31.3.16 Equity Share App. & All. A/C Dr. 5,00,000


To equity Share Capital A/C 5,00,000
Solution
Date Particulars Dr.( amount) Cr.( Amount)
31.3.16 Trade Payables A/C Dr. 3,00,000
To Equity Share Capital (Rs.10) A/C 2,00,000
To Bank A/C 50,000
To Reconstruction A/C 50,000

31.3.16 Land & building A/C Dr. 50,000


To Reconstruction A/C 50,000
31.3.16 Reconstruction A/C Dr. 21,20,000
To Plant & Machinery A/C 90,000
To prov. For doubtful debts A/C 5,000
To Goodwill A/C 25,000
To Share Issue Expenses A/C 20,000
To Surplus A/C 19,80,000
Balance Sheet
Particulars Note Amt. Amt.
No.
I. EQUITY AND LIABILITIES
Shareholder’s Fund
Share Capital 1 8,00,000
Non- Current Liabilities
Long Term Borrowings 2 5,00,000
Current liabilities
Short Term Provisions 3 5,000
___________
TOTAL 13,05,000
II. ASSETS ___________
Fixed Assets 4,90,000
Current Assets 4
Inventories 2,70,000
Trade Receivables 60,000
Cash & Bank Balances 5 4,85,000
__________
Total 13,05,000
__________

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